AAFCPAs would like to make clients aware that the IRS has released final versions of two new Schedules K-2 & K-3 that should be included with tax returns of pass-through entities. These schedules were originally perceived as being required to...
AAFCPAs would like to make clients aware that the IRS has released final versions of two new Schedules K-2 & K-3 that should be included with tax returns of pass-through entities. These schedules were originally perceived as being required to be filed only by entities reporting items of international relevance. However, in its recent January update, the IRS made it clear that these schedules will need to be filed by nearly every pass-through entity, including domestic organizations with no foreign activity.
For tax years beginning in 2021, a partnership, an S corporation as well as certain foreign partnerships must file Schedule K-2 – Partners’ Total International Distributive Share of Items, and Schedule K-3 – Partner’s Share of International income, Deductions, Credits and Other Items. Schedule K-2 summarizes all such activity at the entity level and Schedule K-3 reflects each owner’s allocated share of this activity.
These new schedules are intended to provide more transparency and standardization for the owners of pass-through structures on how to correctly calculate foreign tax credits on their individual income tax returns, Form 1040.
Failure to file complete and accurate Schedules K-2 and K-3 can trigger various penalties that are calculated monthly and can quickly add up for entities with many owners. Recognizing that the adoption of these new schedules will create many challenges for both the taxpayers as well as tax practitioners, the IRS has provided some transition relief with more guidance and answers to come.
As individual taxpayers, you may be getting a level of detail with your Schedule K-3 that you have not previously seen from your Schedule K-1 provider. This information will be especially important if you are required to file Form 1116 (Foreign Tax Credit). Owners should expect to receive a Schedule K-3 from an entity that provides you with a Schedule K-1. AAFCPAs recommends taxpayers inquire about it from your provider. In addition, part of the new reporting will require documentation about owners’ residence or country of organization. You may be asked to furnish Form W-9 or Form W-8 to determine the status as either domestic or foreign partner or shareholder as well as other applicable information.
This topic has been getting quite some attention in the news and with the IRS. These new schedules could be significant in terms of complexity and return preparation time, especially if there are foreign partners or foreign operations. AAFCPAs can help you navigate the new reporting requirements if you are on the receiving end or providing Schedules K-2 and K-3 to your owners. AAFCPAs has also been following the IRS penalty relief measures as well as FAQs that have been released and that continue to be updated and developed. We will continue to follow this evolving topic closely and will provide updates as appropriate.
If you have questions, please contact Bella Amigud, CPA, MST at bamigud@aafcpa.com, Richard L. Weiner, CPA, MST at rweiner@aafcpa.com; or your AAFCPAs Partner.
Author Bio
More Articles
Agentic AI is moving from concept to application—helping nonprofit finance teams streamline workflows with clear guardrails, strong governance, and continued human oversight.
When FQHCs face significant financial losses, strategic cost management and revenue optimization can restore stability while preserving the mission-critical care that defines these organizations.
Financial clarity, when tied directly to program activity, gives leadership teams a more reliable foundation for decision-making and long-term planning.
